Real Estate in Asia Pacific (2018)

Deloitte / Urban Land Institute put up a very informative paper on Real Estate trends in 2018 in the Asia Pacific region (See here Update: No longer working).

Source: The Jakarta Post

Here is a summary of the key takeaways (all credit to the authors) and some of my thoughts below

  • Excess liquidity (China capital controls keeping money onshore, base rates remaining low, accommodative monetary policy pressuring investors to seek higher yield e.g. real estate) is causing intense competition for assets and changing the industry:
    • Traditional risk / return classifications are breaking down: investors are moving up / down the risk curve
    • Opportunistic investors are changing their return expectations, usually downward
    • Core and opportunistic investors are converging in the value-add space. Increasingly, investors are looking to make money from working their assets rather than via leverage or rental growth
    • A byproduct of increased competition for assets is an investor migration into markets and asset classes that in the past did not receive much investments (e.g. data centers, affordable housing projects, build-to-rent, student and senior housing)
  • Boom in shared workplaces, with co-working operators now the biggest demand driver for new office space in many cities across the region
    • Value propositions include: Flexibility of scaling up/down amount of office space needed, encourage greater degree of interaction, facilitate exchanges of ideas and collaboration as well as increase networking opportunities, enjoying shared facilities otherwise not available without scale from sharing, breaks monotony of working at one single office or desk
    • As with the debate on whether open-office concept boosts productivity, there is a grey line between benefits from greater interaction and excessive distraction
    • Users of shared office space seem to be dominated by the younger crowd (millennials) – can brand, or in this case concept, loyalty, be lasting?

  • Developing markets in Asia continue to draw investment interest, particularly Vietnam and India
    • Regional retailers can deal with this buy changing tenant mixes, investing in neighborhood retailing facilities and using technologies (e.g. heat mapping to increase mall efficiency)
    • Landlords have underestimated the eTailing challenge and continue to misinterpret consumer preference
    • While eCommerce has seen tremendous growth (Google and Temasek estimate that SEA’s internet economy will reach $50bn in 2017 and $200bn by 2025, driven primarily by eCommerce and ride hailing), traditional b&m retail in Asia does not seem to have been as adversely affected, as we have not seen any major retailer facing bankruptcy (yet), unlike in the U.S. (Toys R Us, Vitamin World, True Religion, Claire’s, RadioShack etc.)
    • While retailers in the U.S. have embraced the ‘showroom’ concept, moving from pure online DTC to b&m showrooms (e.g. Bonobos, Everlane, Warby Parker) which help to build brand awareness and creates experiential environments, in Asia, more specifically China and Alibaba, there has been a lot of talk around an omnichannel approach of “New Retail”, touted as “the integration of online, offline, logistics and data across a single value chain
    • It is interesting to note that the U.S. has a comparatively large amount of per capita shopping area (24 sq.ft. of retail space per person, ~6x Europe)Investors remain concerned about how the Asian retail sector is going to weather the challenge from eCommerce and remain divided
  • Top investment prospects reflect a growing divergence between investors embracing either growth-or-yield-driven approaches
    • Geography
      • Rental growth – Sydney and Melbourne
      • Returns higher than yields on sovereign bonds – Tokyo
      • Long-term secular growth – Vietnam
    • Asset class – logistics due to long-term structural under supply

Shared Workplaces

  • WeWork immediately comes to mind – a $760mm funding round in Jul 17 gave it a $20bn valuation, making it the world’s 5th most valuable startup
  • It continues to expand in the U.S. as well as the rest of the world, in particular Japan where it plans to make its biggest operation in Asia
  • They do not only cater to smaller companies / start-ups / the self-employed but have also signed up companies like IBM, Microsoft and GE
  • However, there does not seem to be very strong barriers-to-entry as there are increasingly new similar companies and others that cater to niche areas (e.g. startup focused, yoga classes See here)
  • Notable acquisitions show that it is beginning to target niche areas and also diversifying its offerings
    • Conductor (SEO and marketing company)
    • Spacemob (Southeast Asia-based workspace provider)
    • Meetup (Membership software, allowing users to schedule events)
    • The Wing (Investment) (Co-working and community for women)
    • Flatiron School (Coding academy and programming school)
  • Financials and stats (not official)
    • 2017 Sales $1.3bn, 30% operating margins / 2018 Projected Run Rate Sales $2.3bn
    • In 2017, ~45% growth outside North America, increasing to ~2/3 in 2018
    • 52% of desks outside the U.S. by 2018
    • >200,000 users (as of Feb 2018)
    • $20bn valuation implies ~$100,000 per member
  • Investors
    • SoftBank, Benchmark, Fidelity, Goldman Sachs, JPMorgan
  • Update: In Aug 2018, WeWork was just one lease away from being Manhattan’s largest office tenant

Data Centres

  • According to CISCO, by 2021 there will be twice as much mobile data in Asia than in North America and Western Europe combined, driven by the fast-growing middle class
  • It is challenging to find enough available land, especially in densely populated Asian cities that have sky-high rents
  • There are regulatory concerns too – in western countries there are uniform rules on building data centers and financing is methodical, which is often not the case in Asia
  • These combined, however, presents an opportunity for local experts to build data centers and rent them to cloud service providers
  • It is at the intersection of 3 areas of asset class: private equity, real estate and infrastructure
    • There is a need for real estate knowledge to select the right land and price but also operational expertise on running a technology related business
  • Market size
    • Frost & Sullivan estimates APAC’s data center market to generate revenues of $31.95bn by 2022 vs. $14.13bn in 2016
    • CBRE estimates that 5% of real estate investors in Asia have invested in data centers, but they are increasingly open to it
  • Precedent transactions
    • I-squared Capital’s $1.9bn (12.x 2016 EBITDA) acquisition of Hutchison Global Communications (plans to set up data centers in Hong Kong)
  • Public investment opportunities
    • U.S.: Equinix, Digital Realty REIT
    • Asia: Keppel DC REIT